Recent revelations that Kenya no longer had access to its IMF stand-by facility have raised some concerns, especially with respect to the credibility of the Central Bank of Kenya (CBK) and the country’s medium term economic outlook. The IMF later backpedalled slightly saying that the facility was still intact but not available as long as the reviews were incomplete. The reviews could not be completed in June 2017 because Kenya was significantly off track with respect to its fiscal deficit targets, and it was unlikely that President Uhuru Kenyatta’s Administration would have paid much attention to this issue two months before the August general election.
The fund’s main concerns with Kenya are the fiscal deficit and the related increase in its debt, as well as the interest rate cap that has contributed to a throttling of private sector credit. The Treasury has now committed to halving the budget deficit to 4% by 2021 — the initial target had been 3.7% in the coming fiscal year — and to repeal the interest rate cap. The latter, however, requires parliament’s assent, which will be extremely challenging given how quickly and unanimously MPs across the board had signed off on the interest rate cap in the first place.
There has been no announcement yet as to whether the IMF would renew Kenya’s facility. Repealing the interest rate cap will be difficult, and Kenyatta’s Administration has a limited track record in controlling fiscal deficits.
However, the Treasury has agreed to end the VAT exemption for petroleum products — including jet fuel and kerosene from September 2018 onwards — which will add 16% to the price of fuel. Kenya had already committed to the IMF in 2015 to end this exemption by August 2016, but then failed to implement it, no doubt with a view to the 2017 elections. The 16% increase will exacerbate the recent rise in global oil prices and feed through to transport prices, food and other consumer goods and will reduce consumers’ purchasing power. Needless to say, it will be an unpopular policy.